Spring's Financial Market Update

BT Financial Group Investment Specialist Riccardo Briganti brings you our latest market update on both local and international markets, from overseas tensions to the
RBA cash rate ... 

The trend in global equities has been largely positive all year with some hiccups along the way. The latest pullback from record highs occurred in August in response to an escalation of tensions between North Korea and the US, although markets recovered some losses when a more diplomatic approach was seen to replace the brinkmanship being pursued by the countries’ leaders. Australian equities have been less robust and have largely trended sideways since May when a new bank levy was announced in the Commonwealth Budget. Broader concerns about the composition and rate of economic growth have also weighed on Australian equities.

Global growth data has been mixed recently with some indicators improving while others have retraced from recent highs. For example, Purchasing Manager Indices (PMI) which measure conditions in the manufacturing sector have eased back slightly from elevated levels in most regions. In the US, the PMI had been at its highest level since 2014 in June at 57.8 but fell slightly to 56.3 in July. This still suggests the US manufacturing sector is in a strong expansion mode. Other regions saw a similar pattern but the UK PMI has had a different pro le, dipping lower in May and June in response to election uncertainty, but rebounding somewhat in July.

Moderately improving economic activity, the falling unemployment rate and signs that in ation pressures were building saw the US Federal Reserve increase the target range of the fed funds rate by 25 basis points to 1-1.25% at its June Committee meeting. However, recent data suggests in ation is more subdued than expected. The US consumer price index increased by 1.7% in the year to July, calling into question the pace of further US interest rate rises while European in ation has stalled at about 1.3% suggesting the European Central Bank is likely to leave of cial rates unchanged at zero for the foreseeable future.

In Australia, there are signs labour market conditions are improving. In particular, whereas previously employment growth was largely concentrated in part-time work, recent data suggests full-time employment is improving. This is an encouraging sign that business confidence has reached a level where employers are happy to again employ full-time workers, rather than taking a cautious approach with part-time employees. On the downside, wages growth remains anaemic.
In the 12 months to June, wages increased by only 1.9% compared to average wages growth of 3.3% for the previous ve years. This lack of income growth, coupled with other uncertainties, has seen consumer confidence deteriorate in recent months.

Commentary from the Reserve Bank of Australia (RBA) that the neutral official cash rate was likely to be around 3.5% prompted some to expect a rate hike from the bank in the near future and saw the Australian dollar spike higher. The RBA tried to correct any misinterpretation of its comments as implying higher interest rates in the near future and there is little in recent economic data to suggest an impending rate hike.

We believe the RBA will leave the official cash rate unchanged at 1.5% for at least the remainder of 2017.